Auto Loan Analysis - Does this Make Sense?

[thesulli]

Does this make sense?

I'm going to trade a large SUV in for a smaller vehicle.

Price of the new (used) vehicle is $14k. My trade in is worth $8k-$12k. My current loan is $26.5k

So my new loan amount will be between $33k and $28k depending on the final trade in value.

My payments for a 60 month loan at 6% will increase by $100 vs the existing loan (which will be paid off in 58 months... was originally 84 month term) or stay the same depending on the trade in value.

My current ride is a big V8 which eats gas. The new vehicle is a 4 cylinder that sips fuel. Based on my annual KM I estimate to save $2800 per year in fuel costs (@ $1.20 per litre). That's $14,400 over 5 years. $240 per month... so even if my payment increases by $100 per month, I'm still saving $140, or $8,400 over 5 years.

Do doing this make sense? I will be even more upside down in the loan. I'm upside down in the first place because I'm an idiot and did something stupid. I need someone to make sure I'm not being stupid this time!

[Shewillbemine]

No, do not do it. Calculated fuel savings is like dating a super model. Looks good from the outside but never ends up like you imagine.

If you are already upside down on your current loan (and $14,000 - $18,000 upside down is BAD) then you are only digging a deeper hole by rolling the difference into another loan. You end up losing even more money as the other car loses money and depreciates. Think about it for a second. You are buying a more expensive car (relative to yours) by trading in a cheaper one that actually costs more to you. In essence, you are not purchasing a $14,000 car. You are purchasing a $28,000 - $32,000 car if you factor in your upside down. Doesn't that sound sickening? You are spending OVER $28,000 to buy a $14,000 car. In car terms, you're paying the value of a brand new Ford Mustang 5.0 (loaded) but only getting a used Scion XB.

When you are upside down on a car loan and have no cash to front the difference, then you avoid what got you upside down in the first place: purchasing a car with little to no down payment. Rolling the difference into a new car loan only makes it worse, not better. Your only recourse is to continue making the payments until the loan balance slowly catches up to the car's value.

I was in a similar situation but did it a different way: I took out a personal loan from my bank (to pay the difference in upside down value) because I knew I would pay off the loan in only 2 months (I just paid it all off yesterday after yes, 2 months). What prompted me is that the car was an expensive European brand (BMW) and I was no longer covered by warranty and repairs. It was better for me to do so since I did not want to pay for upcoming work. However, I was only able to do so because I KNEW I would have all the money in only 2 months. All in all, the interest the bank charged me cost less than $100.

Keep plugging away at your existing car loan and DO NOT buy a different car. Your mind will fight you because it will try to rationalize the cost based on your sub-conscious desire for a different vehicle. Be strong and get out of the mess you created the right way.

[thesulli]

Thanks. You are right.

[DebbieL]

I'm assuming you are in Canada (like me). Current gas price here for regular is $1.24/litre. I would actually advise you to go ahead and get rid of the gas guzzler. Things are only going to get worse IMO. I don't know if I would spend a bunch extra on a new, small car. Just stick with what you can get for the current value of your SUV. You can get a very nice, economical car in that price range.

[Shewillbemine]

^^ This advice only works if the OP were NOT upside down by 5 digits on his/her current car loan.

If the OP changed the car with this plan and somehow managed to actually save that much gas money consistently (unlikely; saving gas is a matter of driving habit and less car's ability to sip it; a newer car albeit used means the OP will also likely drive more; we tend to use the newest things we've purchased; also unlikely not to spend extras on any new vehicle even if it's used: air freshener, floor mats, car washes, car washing products, stereo, tint, etc) it would take at least FIVE YEARS to make up the difference of the old loan versus new loan. And that does NOT include the $14,000 of the actual new car itself. In essence, that is 10 YEARS worth of new car loan and gas savings he is trying to recoup and pay down for a car that will be 12 - 15 years old at that point. Bad situation just went to worse.

And the original situation in which an $8,000 car (low ball) still has a $26,000 loan on it can only mean a few things:

1. The OP paid waaaay too much money for the V8 when it was purchased with absolutely no down payment. No car depreciates this much. The buying price must have been ridiculously overmarked and he paid it anyway.
2. The OP rolled in a previous, upside down car loan into the V8 because it was a sexy purchase at the time and he just had to have it. Hence, we are probably looking at the 2nd upside down car loan that he is contemplating of rolling in again.

If this keeps up, the OP could literally be paying a $5000 car with over $30,000 in loans. How bad does it have to get?

And since Canadian purchased cars cost more money than American purchased cars, then the real numbers are closer to a $6000 value car to over $30,000 existing car loan!

Car purchasing is one of the biggest temptations and misunderstood processes in the economic world. It's no wonder people are visibly scared when they have to walk onto a car lot. There are ways to do this correctly and rolling upside down loans into more loans is NOT the way to do it. Live with the V8, ADJUST YOUR DRIVING HABITS TO SAVE MORE GAS, and do it the right way. Every V8 owner I know and see on the street can't resist drag racing up and down the tarmac; this has nothing to do with the car. It's the car owner.

[emanon1501]

Can you sell the SUV out right and get what you can for it. There is a difference between the trade in value vs selling it yourself. If you are willing to take that kind of lost at the trade in, then you will be able to sell it little bit cheaper than what the dealers would sell it for, and still come out ahead than if you had trade it in.

[Shewillbemine]

Can you sell the SUV out right and get what you can for it. There is a difference between the trade in value vs selling it yourself. If you are willing to take that kind of lost at the trade in, then you will be able to sell it little bit cheaper than what the dealers would sell it for, and still come out ahead than if you had trade it in.

Not sure if you read all the info or considered the whole situation. OP is contemplating trading in an upside down car and rolling in the difference into a new, higher loan. Fairly obvious OP doesn't have the money for the difference so selling the car privately to get an extra couple hundred or a couple thousand dollars won't be a big dent into an $18,000 difference.

[thesulli]

Thanks for the replies all.

Cash flow isn't a huge issue for me, but, obviously, I don't have a pile of dough sitting around that I can wipe out the "upside-down-ness" of the loan (thus, cant sell privately, impossible to get clean title). So I think I'm going to increase my monthly payment and hopefully get the car down to the point where loan = value in a year or two.

It was #2. Idiotic, emotional purchase. I think I put maybe $500 bucks down. Moron! We do enjoy driving it however.

Unfortunately I don't think the gas savings are understated. My current ride is a large 4.7l V8 SUV. We drive about 30k per year and the fuel economy is between 16 and 18 litres / 100k.

I was looking at a smaller vehicle with a 2.3l 4 cylinder. Around 9 to 11 litres / 100k. Driving 30k per year, the fuel savings are fairly significant. That said, doesn't make sense to move until I get the loan down to the value of the damn thing.

[jpg7n16]

Cash flow isn't a huge issue for me, but, obviously, I don't have a pile of dough sitting around that I can wipe out the "upside-down-ness" of the loan

If cashflow isn't a problem for you, why don't you have a large amount of dough sitting around? What happens to all your excess cash each month?


And I think you should trade in your SUV - but not towards a more expensive car. If your SUV is 8-12k trade in, why can't you just trade it for an 8-12k car that gets double the gas mileage?

Then you'd incur no more debt, and your gas expense would be cut in half each month. Use the gas savings to pay extra on the loan and one day you'll be free of this mess.


But on a much more important note, if you have as much cashflow as you say you have, you really need to evaluate the rest of your budget. Where does all your money go? There are some pretty great minds here that would be willing to help you re-evaluate your budget if you post it.

[Shewillbemine]

If cashflow isn't a problem for you, why don't you have a large amount of dough sitting around? What happens to all your excess cash each month?

An unbelievably simple, astute and intelligent question that many people don't really have an answer for. I believe when people say "cash flow is not a problem", that really means I make just enough to pay for everything I own and need to have but as far as excess cash, no, we don't really have that.

[bones72]

Right on the money! DON'T DO IT! I am a career Car Dealer! Shewillbemine is very correct. You are digging a huge hole for yourself. Don't Do The Deal! You CANNOT trade in a vehicle with that kind of negative equity and think you will save money on gasoline. Period. Besides, those big ol' SUV's are my favorite vehicle.

No, do not do it. Calculated fuel savings is like dating a super model. Looks good from the outside but never ends up like you imagine.

If you are already upside down on your current loan (and $14,000 - $18,000 upside down is BAD) then you are only digging a deeper hole by rolling the difference into another loan. You end up losing even more money as the other car loses money and depreciates. Think about it for a second. You are buying a more expensive car (relative to yours) by trading in a cheaper one that actually costs more to you. In essence, you are not purchasing a $14,000 car. You are purchasing a $28,000 - $32,000 car if you factor in your upside down. Doesn't that sound sickening? You are spending OVER $28,000 to buy a $14,000 car. In car terms, you're paying the value of a brand new Ford Mustang 5.0 (loaded) but only getting a used Scion XB.

When you are upside down on a car loan and have no cash to front the difference, then you avoid what got you upside down in the first place: purchasing a car with little to no down payment. Rolling the difference into a new car loan only makes it worse, not better. Your only recourse is to continue making the payments until the loan balance slowly catches up to the car's value.

I was in a similar situation but did it a different way: I took out a personal loan from my bank (to pay the difference in upside down value) because I knew I would pay off the loan in only 2 months (I just paid it all off yesterday after yes, 2 months). What prompted me is that the car was an expensive European brand (BMW) and I was no longer covered by warranty and repairs. It was better for me to do so since I did not want to pay for upcoming work. However, I was only able to do so because I KNEW I would have all the money in only 2 months. All in all, the interest the bank charged me cost less than $100.

Keep plugging away at your existing car loan and DO NOT buy a different car. Your mind will fight you because it will try to rationalize the cost based on your sub-conscious desire for a different vehicle. Be strong and get out of the mess you created the right way.

[emanon1501]

I still think you should think about selling it. You can get a personal loan or something to pay off the difference. Remember, you will get more money for it, but only if you sell it yourself vs trading it.

Then, you can by a used car for less than $5,000 that gets good MPG until you pay off the difference.

That is what I did. I had a diesel truck few years ago, when the diesel fuel hit $4.50. I sold it for for a fraction of price and bought a $2,300 car with 190,000 miles on it, and I still drive that car today (240,000 miles on it now). I lost a lot of money when I sold it, but in the long run, I saved money.

[bjl584]

If cashflow isn't a problem for you, why don't you have a large amount of dough sitting around? What happens to all your excess cash each month?


And I think you should trade in your SUV - but not towards a more expensive car. If your SUV is 8-12k trade in, why can't you just trade it for an 8-12k car that gets double the gas mileage?

Then you'd incur no more debt, and your gas expense would be cut in half each month. Use the gas savings to pay extra on the loan and one day you'll be free of this mess.


But on a much more important note, if you have as much cashflow as you say you have, you really need to evaluate the rest of your budget. Where does all your money go? There are some pretty great minds here that would be willing to help you re-evaluate your budget if you post it.

This is probably your best bet. Trade in the car on something that is equivilant to the value of what you are driving now.

[littleroc02us]

Does this make sense?

I'm going to trade a large SUV in for a smaller vehicle.

Price of the new (used) vehicle is $14k. My trade in is worth $8k-$12k. My current loan is $26.5k

So my new loan amount will be between $33k and $28k depending on the final trade in value.

My payments for a 60 month loan at 6% will increase by $100 vs the existing loan (which will be paid off in 58 months... was originally 84 month term) or stay the same depending on the trade in value.

My current ride is a big V8 which eats gas. The new vehicle is a 4 cylinder that sips fuel. Based on my annual KM I estimate to save $2800 per year in fuel costs (@ $1.20 per litre). That's $14,400 over 5 years. $240 per month... so even if my payment increases by $100 per month, I'm still saving $140, or $8,400 over 5 years.

Do doing this make sense? I will be even more upside down in the loan. I'm upside down in the first place because I'm an idiot and did something stupid. I need someone to make sure I'm not being stupid this time!

Is that KBB value or just trade in? Why do you owe so much on an SUV that isn't worth much? Personally you would have to stay in the vehicle for 10-15 years to make it worth your while. You are sucking up a ton of debt.

[tripods68]

The better solution is paid off the car ASAP than trading it with negative equity. Then sell it and buy a cheaper old car with excellent gas mileage....